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Likelihood Evidence on the Asset Returns Puzzle

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  • Efthymios G. Tsionas

Abstract

Standard equilibrium models are unable to replicate the average return on equity and the risk-free rate during 1889-1978, the well-known asset returns puzzle. The present paper, motivated by the excess of outliers in the data, proposes a normal-scale mixture stochastic process for output that is compatible with leptokurtosis. Using formal likelihood-based methods, it is shown that observed asset returns are compatible with posterior distributions implied by the model. Copyright 2005, Wiley-Blackwell.

Suggested Citation

  • Efthymios G. Tsionas, 2005. "Likelihood Evidence on the Asset Returns Puzzle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 917-946.
    • Handle: RePEc:oup:restud:v:72:y:2005:i:3:p:917-946
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    File URL: http://hdl.handle.net/10.1111/j.1467-937X.2005.00356.x
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    Cited by:

    1. Gurdip Bakshi, 2009. "Du subjectiv expectations explain asset pricing puzzles?," 2009 Meeting Papers 1234, Society for Economic Dynamics.
    2. Emi Nakamura & Jón Steinsson & Robert Barro & José Ursúa, 2013. "Crises and Recoveries in an Empirical Model of Consumption Disasters," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 35-74, July.
    3. Bakshi, Gurdip & Skoulakis, Georgios, 2010. "Do subjective expectations explain asset pricing puzzles?," Journal of Financial Economics, Elsevier, vol. 98(3), pages 462-477, December.
    4. Assaf, A. George & Gillen, David & Tsionas, Efthymios G., 2014. "Understanding relative efficiency among airports: A general dynamic model for distinguishing technical and allocative efficiency," Transportation Research Part B: Methodological, Elsevier, vol. 70(C), pages 18-34.

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